Member Mailing: Fox's "Less is More" & Paramount Global (née ViacomCBS) in 2022
Key Takeaways
Investors reacted negatively to ViacomCBS's rebrand as Paramount Global and its growth story for streaming
In 2017, Paramount Chair Shari Redstone's push for the ViacomCBS merger ran contrary to how leaders like Fox's Rupert Murdoch and Disney's Robert Iger foresaw disruption in media
That foresight led to the sale of 21st Century Fox assets to Disney, and a "less is more" structure for Fox Corporation
Fox's simple structure has a P-E ratio that is 4x Paramount, and has jettisoned its streaming model
If Fox's "less is more" structure is a model Wall Street rewards in 2022, should Paramount adopt it in order to drive value creation? And why is Disney a logical buyer?
As of this morning, the Murdoch family's Fox Corporation has a market capitalization of ~$23B and a price-to-earnings (P-E) ratio of ~17. Paramount Global (née ViacomCBS) has a market capitalization of $18.4B and a P-E ratio of 4.25.
Fox's stock popped by 10% after its Q4 2021 earnings call, and Paramount's dropped by 20% after its Q4 call. They reflect two very different outcomes for two almost opposite bets made in 2017 by Fox Chairman Rupert Murdoch and Paramount's non-executive Chairwoman Shari Redstone: Murdoch opted to sell 21st Century Fox assets to Disney, and Redstone opted to double down on a push (and eventually a putsch of CBS leadership) to merge Viacom and CBS.
The difference came to mind because of something that has been getting surprisingly little commentary as of late: Lawsuits by Viacom and CBS shareholders against Redstone are still live in Delaware courts, delayed in part by backlog from the pandemic.
Those lawsuits allege that Redstone - with CBS and Viacom management and boards of directors - drove a merger that was unfair to Viacom and CBS shareholders and the merger was a product of actionable breaches of fiduciary duty. In other words, Redstone drove the merger in her self-interest as the controlling shareholder and at the expense of shareholder interests and shareholder value creation (the market capitalization of the merged entity was $5B less than CBS Corporation's pre-merger market capitalization).
After Paramount's Q4 2021 Investor presentation, Shari Redstone now finds herself at the center of "a tragedy", as Anna Nicolau and Alex Barker reported in The Financial Times last week:
...investors are unconvinced that in an entertainment landscape filled with much bigger competitors — such as Netflix, Amazon and Disney — Paramount can compete on its own. For some investors and analysts, its best move is to sell to a larger rival.
This has created a peculiar situation where Redstone’s ambitions for her company, and perceived willingness to protect its independence, appear almost inversely correlated to its stock market performance.
In other words, in 2022 Redstone seems to be facing similar circumstances to 2017: Paramount has its independence, but it is too small to compete in streaming and also finds little to no demand for the entire entity, as is, from potential acquirors. Moreover, its growth story eats in to cash flow: its operating income is projected to lose $1B per year between 2021 and 2024.
Faced with similar circumstances but with the opportunity to do it all again differently, what should Shari Redstone do? What are outcomes that will be rewarded with a higher P-E ratio and market cap from Wall Street that also drive shareholder value creation?
And, why are Fox's strategic and operational rationales for having sold to Disney in 2017 relevant to Paramount in 2022?
[Author's Note: The rest of this essay will be exclusive to members, only.]
Murdoch, Disney & Fox
Murdoch's outcome for Fox has been the opposite of a tragedy, both for Fox shareholders and for him personally.
He traded control of 21st Century Fox for a 4.25% stake in Disney at $107 per share, which at the time was estimated to be anywhere between $10B and $12B and made them one of the biggest investors in Disney. That now may be worth as much as $14B to $17B (though it is likely lower because the Murdoch children took cash and stock).
But, in the context of Paramount's future, the more notable outcome is how the "less is more" simplicity of Fox's corporate structure and focus contrasts with the complexity of Paramount's.
Fox is a news, sports and entertainment company with three business segments, according to its most recent 10-Q:
Cable Networks
Television (Fox Network and Tubi TV)
Other, Corporate and Eliminations (the FOX Studio Lot, Credible Labs Inc. (a U.S. consumer finance marketplace), corporate overhead costs and intracompany eliminations.
Paramount also has three segments, but recently reorganized from TV Entertainment, Cable Networks and Filmed Entertainment to a new structure, as described in its most recent 10-K:
TV MEDIA: TV Media consists of our historical TV Entertainment and Cable Networks segments, except that it no longer includes their corresponding direct-to-consumer streaming services (now part of our Direct-to-Consumer segment) and Nickelodeon Studio (now part of our Filmed Entertainment segment), and now includes Paramount Television Studios (formerly part of our historical Filmed Entertainment segment).
DIRECT-TO-CONSUMER: Direct-to-Consumer consists of our portfolio of free, premium and pay streaming services, including Paramount+, Pluto TV, Showtime OTT, BET+ and Noggin.
FILMED ENTERTAINMENT: Filmed Entertainment consists of our historical Filmed Entertainment segment, except that it no longer includes Paramount Television Studios (now part of our TV Media segment), and now includes Nickelodeon Studio (formerly part of our historical Cable Networks segment).
The obvious differences are that Paramount continues to embrace two business models that Fox actively sold off in 2017: direct-to-consumer premium and pay streaming, and filmed entertainment. But these descriptions also reveal that five years after Fox's sale to Disney and three years after the ViacomCBS merger, Paramount has only recently figured out how streaming operationally fits into the larger business.
In other words, in 2022 Fox is operationally lean where Paramount seems overburdened, despite the optics.
What Murdoch Foresaw in 2017
So, not only does Paramount Global seem late to realizing what its business model in streaming should look like, but it also seems to be doubling down on strategic and operational models for a media company that Murdoch purposefully avoided with his decision to sell in 2017.
I think the most insight we have into Murdoch's mindset in 2017 is from Robert Iger's memoir "The Ride of A Lifetime". Murdoch called Iger for a meeting two weeks after Disney had announced in its FY Q3 2017 earnings call that it was buying full control of BAMTech and planned to launch ESPN+ in 2018 and Disney+ in 2019.
Iger had assumed that Murdoch wanted to discuss Iger's rumored presidential ambitions, but Murdoch wanted to discuss an acquisition:
I wondered what Rupert and I would talk about for the rest of our time together, but he proceeded to spend most of the next hour talking about the threats to our respective businesses: the incursion of big tech companies, the speed at which things were changing, how much scale mattered. He was clearly worried about the future of 21st Century Fox. "We don't have scale," he said several times. "The only company that has scale is you."
As I said goodbye to him that evening, I couldn't help but think he was signaling an interest in doing the unthinkable. I called Alan Braverman on my drive home and said, "I just met with Rupert. I think he might be interested in selling."
Murdoch was willing to break up 21st Century Fox because he could not see a road ahead to scale with his existing assets given the "sweeping" disruption of technology in media. The timing of his call to Iger suggests that, but for Disney having taken control of BAMTech, Murdoch may not have foreseen that path ahead for Disney, either [Note: Alan Braverman is EVP & General Counsel of Disney].
In other words, Disney's acquisition of BAMTech's existing streaming distribution platform was a key advantage no one else had: No one else other than Netflix had BAMTech's existing scale or ability to scale globally. This offered Murdoch both an exit strategy and an investment opportunity for both his family and Fox shareholders.
It is also worth adding that the post-merger restructuring of Disney that Iger imagined in 2017 (with then Chairman of the Direct-to-Consumer & International Kevin Mayer) has similar business logic to the structure that Paramount Global just adopted (without the theme parks), as Iger described in "The Ride of A Lifetime":
We would have three content groups movies (Walt Disney Animation, Disney Studios, Pixar, Marvel Lucasfilm, Twentieth Century Fox, Fox 2000, Fox Searchlight), television (ABC, ABC News, our television stations, Disney channels, Freeform, FX, National Geographic), and sports (ESPN). All of that went on the left side of the whiteboard. On the other side went tech: apps, user interfaces, customer acquisition and retention, data management, sales, distribution, and so on. The idea was simply to let the content people focus on creativity and let the tech people focus on how to distribute things and, for the most part, generate revenue in the most successful ways. Then, in the middle of the board I wrote "physical entertainment and goods," an umbrella for various large and sprawling businesses: consumer products, Disney stores, all of our global merchandise and licensing agreements, cruises, resorts, and our six theme-park businesses.
I stepped back and looked at the board and thought, There it is. That's what a modern media company should look like.
Notably, Paramount opted for this new "modern media company" structure only after having relaunched CBS All-Access as Paramount+ in 2021, and after having built a growth story for Wall Street about its Direct-to-Consumer division in 2022. What Iger foresaw in 2017 is what Paramount evolved into only last week.
Shari Redstone's Focus in 2017
In 2016 Shari Redstone assumed the roles of vice chairperson of CBS and Viacom and president of National Amusements. At that point the market capitalizations of Viacom and CBS Corporation, both of which had yo-yoed between $20B and $30B in previous years, began to diverge.
Viacom was at~$15B and CBS was at ~$24B, or valued 60% higher than Viacom. The irony of all that was, when her father Sumner Redstone had split up the two companies in 2005, the assumption was that Viacom would be a growth stock valued at a higher P/E multiple.
Instead, the opposite happened because of mismanagement of Viacom both under Sumner Redstone and under CEO Bob Bakish's predecessor, Philippe Dauman. As a result, linear networks like MTV and VH1 - originally considered growth engines at Viacom - were now considered lower value albatrosses on the brand.
After pushing out Dauman from Viacom (and from her father's will) in May 2016, Redstone assumed the role of rescuing the value of Viacom. Redstone wanted a merger and wanted CBS CEO Les Moonves to run both companies. She sent a letter to both companies encouraging a merger, but Moonves declined the offer and the letter was withdrawn three months later.
On this point, it's worth highlighting a quote from Redstone to Recode's Peter Kafka at the Code Conference from May 2017:
[Peter Kafka]: To put a fine point on it, most people who follow this say what happened is you wanted Les Moonves to run both companies and for whatever reason, he didn’t want to do that.
[Shari Redstone]: I have a great relationship with Les, and I think that we would have worked really well together on a combined company, but I think, like I said, at that point in time, you look at the valuations: We were undervalued. The change for me was, ‘Oh my god, there is potential here, there is opportunity here, we can do this.’ ... And it took me some time to figure out because, to be honest, I wasn’t the most welcome person at Viacom for the few years prior to the ultimate changes.
Moonves was forced out 16 months later.
At the time, I knew CBS leadership personally, and had opportunities to discuss the rumored merger with them: the general perception was that Nickelodeon and Paramount had the most value in a business needing more scale and content to feed a growing streaming business. Everything else in the Viacom portfolio was perceived to have little or even negative value to CBS, even in streaming (where library matters).
Redstone assumed the combined entities would have more scale to compete. But, through the eyes of Moonves and his leadership, greater scale would not solve for the damage that had been done to Viacom's brands, or the cord-cutting trends that were further negatively impacting those businesses.
This sentiment was captured in a 2018 Hollywood Reporter article, where Moonves was quoted as privately describing the struggling Viacom channels as "an albatross, fearing he’d be pressured into bundling MTV, Nick, Comedy Central, VH1 and others into CBS carriage deals":
“Moonves believes that the value of CBS’ assets will not be maximized by combining with Viacom, which would increase CBS’ exposure to the declining U.S. pay-television market, as well as cable advertising,” says Ben Weiss, chief investment officer at 8th & Jackson Capital Management, adding that “CBS wants to reduce its reliance on advertising.”
Like Moonves, Disney's Robert Iger and 21st Century Fox's Rupert Murdoch were worried about the "sweeping" disruption from tech companies in media, and saw survival in additional scale from both streaming growth, recurring subscription revenues and decreased exposure to cord-cutting.
But, Shari Redstone zigged where they zagged, betting on increased exposure to cord-cutting with a merged entity and growth through a portfolio of niche streaming services on Amazon Channels (MTV Hits, NickHits, Comedy Central Now), niche streaming services for brands (BET+, Noggin), its two bigger streaming services (CBS All-Access (now Paramount+), Showtime), and a fast-growing AVOD asset acquired in late 2018 (Pluto TV).
In short, Redstone saw the way forward via a messy and unhappy operational and strategic marriage of two very different businesses at a time when other media moguls like Iger and Murdoch (and Moonves) were seeking operational and strategic clarity.
In fairness, it is not clear what other options were available for Viacom as a business, then. It could be argued that Redstone had a duty to Viacom shareholders to maximize the value of the business, and a merger may have been the only path forward as a sale of Viacom otherwise would have been a fire sale, also at a detriment to shareholders (meaning, the market agreed with Moonves in his perspective of Viacom's networks were an "albatross").
But, Redstone's bet on a merger led to a set of decisions that directed CBS away from a strategy that mirrored both Disney's and 21st Century Fox's understanding of the "sweeping" disruption from tech companies in media.
For CBS shareholders, in particular, they were left holding shares in a stock with a market cap of $18B, or 22% lower than pre-merger CBS Corporation.
Moreover, the result has been a stock whose best performance came in 2021 from an irrational spike in the price during the pandemic due to the collapse of the $10B Archegos fund and meme trading.
Two "Less Is More" Scenarios for Paramount in 2022
Fast forward to 2022, and Paramount's entire Investor Day presentation sought to spin its accomplishments over the past three years as a streaming growth story. Excluding some key details (it has six subscription services), the story is a growth story.
CEO Bob Bakish and his team deserve credit for pulling it off after starting with a weak hand. The problem is, the growth story is so complicated that it drowns out positive metrics like $100MM in improved profits from TV Media and 49% year-over-year growth for Pluto TV. Both are individual stories that, in the case of Fox, Wall Street has not hesitated to reward with a higher P-E multiple.
So should Paramount refine its business in order to deliver value creation for shareholders?
As I told Observer’s Brandon Katz last year in “Paramount+ Mobilizes Against Netflix, But Can It Compete?, I think the best model for Paramount is:
“Sports plus breaking news plus kids plus Pluto is a business,” Rosen surmised. “Everything else they’re better off selling to Netflix.”
I think this take has held up unusually well, and it mirrors the "less is more" driving motivation of Rupert Murdoch to sell to Disney in 2017.
Here are two "less is more scenarios" that Redstone could pursue in 2022 that mirror my take and are analogous to the driving business logic of the Disney-Fox merger.
1. Unapologetically Imitate Fox
Basically, this would be offloading the risks of all cable networks except Nickelodeon, production and streaming distribution (except Noggin) to a third party. The remaining business would be CBS Network, CBS News, Nickelodeon and Pluto TV. That would be a growth business (Pluto TV, sports) with positive cash margins (CBS, Nickelodeon).
Notably, if the Fox P-E ratio of 17 were applied based on Pluto's annual revenues and growth, alone, that business would have a higher market capitalization ($18.7B) as Paramount's current complex business, above ($18.23B).
Throw in CBS's profitable TV Networks business and Nickelodeon's content - a key driving factor in Paramount+'s growth, and kids and family is content is 60% of Netflix consumption- as drivers and Paramount Global has a cleaner growth and cash-generating story for investors.
One obvious question, of course, is who would want to buy the cable networks businesses from Paramount without Nickelodeon and/or Paramount studios (more on that below). The other question is what a streaming solution for CBS sports and Nickelodeon content would look like with a smaller library and sports, only. That latter question remains a thorny one in media in 2022.
2. Disney+, Star & Hulu
Disney needs to be able to continue to tell a growth story in streaming. Excluding Nickelodeon, ViacomCBS's cable network audiences overlap pretty strongly with Hulu and Star. Last August, Parrot Analytics found that ViacomCBS content makes up 7.4% of the licensed catalog demand for Hulu (compared to 24.8% for Amazon Prime Video and 25.6% for Netflix).
As it loses a large chunk of on-demand unscripted content to Discovery's streaming business, Hulu is making a big bet on unscripted with The Kardashians (the first trailer came out yesterday). It also just struck a deal with Fox Entertainment for streaming all past seasons of Fox unscripted series.
So, Hulu is in building mode for owned and original unscripted content, and Paramount's linear channels (MTV, VH1) offer a library of unscripted content. Moreover, as Paramount's linear brands are popular in international markets, the growth of Star could benefit from these brands, too.
Last, Viacom has been building out the foundation of a global Spanish-language content production business. That content production would fit neatly into Disney's growing Star+ business in Latin America.
Disney needs a jolt to its streaming story for investors, and a bigger library of unscripted content for Hulu, Star and Star+ may help it.
3. Four Additional Scenarios
I think there are four additional possible outcomes that are worth exploring on their own:
PARQOR Hypothesis Outcome: Disney or Comcast buy all of Paramount (but spin off CBS due to U.S. regulation of TV network ownership) in a Disney-Fox logic deal where the Redstones and Paramount shareholders get a share of the larger business. Disney or Comcast proceed to leverage Paramount IP in their respective theme parks businesses and build a centralized relationship with consumers across platforms. Paramount shareholders get shares in Disney or Comcast and share in the upside.
Merge with Roku: Paramount takes a page from Comcast’s strategy in streaming because they are “the only ones with both feet on both sides” of the streaming marketplace with X1 software and Peacock, and merges with Roku. Roku gets a big boost for its recent move into original content production, and now would capture 100% of ad revenues off of Paramount's content library. A merger would effectively double the market cap of both companies and offer a better business model for streaming.
Sell Linear Networks to Warner Bros. Discovery: The financial model for Warner Bros. Discovery relies heavily on revenues and profits from cable networks, despite declining audiences. They may see more upside in Paramount's linear channels business - including increased premium ad inventory - bundled with Warner Bros. Discovery channels, both domestically and internationally, than Paramount could achieve on its own.
Do Nothing, The Market Is Irrational: Or, maybe everyone is over-reacting to Netflix's miss and bearish signals for streaming and Paramount is on the right path to growth.
Conclusion
Concededly, these are broad brushstroke arguments and scenarios that look past key metrics like Operating Income, EBITDA, and Enterprise Value to EBITDA ratios. All three may end up being more important to any buyer of Paramount's assets than the appeal of strategic fit. Meaning, there simply may not be market demand for the scenarios I have laid out because the economics do not add up.
That said, Fox Corporation emerged from Rupert Murdoch's broad brushstroke conclusion that 21st Century Fox could not compete with the disruption from emerging media technologies, and ViacomCBS emerged from Shari Redstone's broad brushstroke conclusion that Viacom needed to survive at all costs. Only Murdoch objectively seems to have reach the right conclusion five years on.
If 2022 marks a crossroads for Redstone that mirrors the one she faced in 2017, there are plenty of simpler business models that Wall Street is more inclined to reward with a higher P-E ratio than the one Redstone has pursued by betting so heavily on streaming. Even Lionsgate - which is a combination of a film studio and a streaming business that is progressively and successfully cannibalizing a linear network business - has a higher P-E ratio of 11.6 at 1/6th the market cap ($3B).
I think "sports plus breaking news plus kids plus Pluto" offers an imperfect though feasible solution. But, that is my personal bias, and it should not distract from the larger point: Rupert Murdoch figured out "less is more" as a solution to disruption in 2017.
If 2022 is 2017 all over again, the question is whether Shari Redstone and Paramount management understand that "less is more" will be the best strategy for value creation for shareholders. The hesitation seems to be that splitting up the company would be an admission of failure.
But, with a chance for a "mulligan" of 2017 in 2022 and with Fox as market precedent, shareholders seem eager to reward Paramount if it pursued a new, leaner and less streaming-focused direction. There are companies better positioned to be a modern media company than Paramount who need Paramount's assets to grow in streaming. In that regard, Disney seems to be a logical fit in surprising ways.